UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 0-23253

ITC^DELTACOM, INC.

(Exact name of registrant as specified in its charter)

Delaware		58-2301135
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1375 Peachtree St., Atlanta, Georgia		30309
(Address of principal executive offices)		(Zip Code)

(404) 815-0770

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report date)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o

Non-accelerated filer x		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of ~~October~~April 3130, ~~2011~~2012, 250 shares of common stock, $0.01 par value per share, were outstanding. (all shares are issued to EarthLink, Inc.).

ITC^DELTACOM, INC. MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS (H)(1)(A) AND (B) OF FORM 10-Q AND IS THEREFORE FILING THIS REPORT WITH THE REDUCED DISCLOSURE FORMAT.

Table of Contents

ITC^DELTACOM, INC.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended ~~September~~March 3031, ~~2011~~2012

TABLE OF CONTENTS

Part I
Item 1. Financial Statements	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1311
Item 4. Controls and Procedures	2320
Part II
Item 1. Legal Proceedings	2420
Item 1A. Risk Factors	2420
Item 5. Other Information	2420
Item 6. Exhibits	2421
Signatures	2522

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ITC^DELTACOM, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	December 31,			~~September~~March 3031,
	2010			2011
	2011			2012
				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4334,~~585~~930		$	5045,~~216~~619
Restricted cash	21,~~270~~781			1,~~781~~063
Accounts receivable, net of allowance of $276 and $2,382 as of December 31, 2010 and September 30, 2011, respectively	40,242			43,179
Accounts receivable, net of allowance of $2,519 and $2,620 as of December 31, 2011 and March 31, 2012, respectively	43,851			40,189
Prepaid expenses	86,~~494~~143			67,~~113~~439
Other current assets	5,522			3,559
Receivable due from parent	913			601
Total current assets	100,113			104,848
Other current assets	5,034			5,731
Property and equipment, net	206,988			210,578
Total current assets	92,652			100,642
Purchased intangible assets, net	129,650			127,893
Property and equipment, net	213,438			214,797
Goodwill	~~170~~194,~~126~~761			~~195~~194,~~229~~690
Other long-term assets	170			84
Other intangible assets, net	121,115			114,337
Total assets	$	607,047		$	638,632
Other long-term assets	82			81
Total assets	$	622,048		$	624,547
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	114,~~734~~680		$	76,~~918~~084
Accrued payroll and related expenses	48,~~053~~154			95,~~863~~523
Accrued interest	8,~~622~~626			17,~~160~~158
Other accrued liabilities	3729,~~845~~055			2826,~~608~~525
Deferred revenue	1925,~~844~~410			25,~~045~~495
Current portion of long term debt and capital lease obligations	—419			~~607~~336
Total current liabilities	8276,~~098~~344			8981,~~201~~121
Long-term debt and capital lease obligations	~~351~~347,~~251~~364			~~348~~346,~~586~~207
Other long-term liabilities	7,~~874~~045			6,~~872~~844
Total liabilities	~~441~~430,~~223~~753			~~444~~434,~~659~~172
Stockholders’ equity:
Common stock, $0.01 par value, 1,000 shares authorized, 150 and 250 shares issued and outstanding as of December 31, 2010 and September 30, 2011, respectively	—			—
Common stock, $0.01 par value, 1,000 shares authorized, 250 shares issued and outstanding as of December 31, 2011 and March 31, 2012	—			—
Additional paid-in capital	~~176~~218,~~194~~663			~~217~~219,~~474~~185
Accumulated deficit	(1027,~~370~~368		)	(2328,~~501~~810		)
Total stockholders’ equity	~~165~~191,~~824~~295			~~193~~190,~~973~~375
Total liabilities and stockholders’ equity	$	~~607~~622,~~047~~048		$	~~638~~624,~~632~~547

The accompanying notes are an integral part of these financial statements.

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ITC^DELTACOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~OPERATIONS~~COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended							Nine Months Ended
	Three Months Ended March 31,
	Predecessor				Successor			Predecessor			Successor
	2011			2012
	Entity				Entity			Entity			Entity
Revenues:
	September 30,				September 30,			September 30,			September 30,
Retail services	$	88,672		$	89,615
	2010				2011			2010			2011
Wholesale services	17,568			19,015
Revenues:
Other services	3,576			3,325
Retail services	$	90,466			$	92,260		$	275,627		$	273,497
Total revenues	109,816			111,955
Wholesale services	16,330				17,952			45,900			53,100
Operating costs and expenses:
Other services	4,124				3,151			11,433			10,361
Cost of revenues (exclusive of depreciation and amortization shown separately below)	54,378			54,540
Total revenues	110,920				113,363			332,960			336,958
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	35,704			33,615
Operating costs and expenses:
Depreciation and amortization	16,666			17,329
Cost of revenues (exclusive of depreciation and amortization shown separately below)	54,736				54,020			158,006			163,944
Acquisition and integration-related costs	825			274
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	35,325				32,739			108,908			105,745
Total operating costs and expenses	107,573			105,758
Depreciation and amortization	13,810				18,286			42,280			53,182
Income from operations	2,243			6,197
Acquisition-related costs	2,064				1,664			2,064			3,546
Interest expense and other, net	(7,554		)	(7,515		)
Total operating costs and expenses	105,935				106,709			311,258			326,417
Loss before income taxes	(5,311		)	(1,318		)
Income from operations	4,985				6,654			21,702			10,541
Income tax provision	(287		)	(124		)
Interest expense and other, net	(9,683		)		(7,687		)	(30,527		)	(23,378		)
Net loss	$	(5,598	)	$	(1,442	)
Loss before income taxes	(4,698		)		(1,033		)	(8,825		)	(12,837		)
Comprehensive loss	$	(5,598	)	$	(1,442	)
Income tax provision	—				(261		)	—			(294		)
Net loss	$	(4,698	)		$	(1,294	)	$	(8,825	)	$	(13,131	)

The accompanying notes are an integral part of these financial statements.

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ITC^DELTACOM, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Predecessor Entity				Successor Entity
	Three Months Ended March 31,
	Nine Months				Nine Months
	2011			2012
	Ended				Ended
Cash flows from operating activities:
	September 30, 2010				September 30, 2011
Net loss	$	(5,598	)	$	(1,442	)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Net loss	$	(8,825	)		$	(13,131	)
Depreciation and amortization	16,666			17,329
Adjustments to reconcile net loss to net cash provided by operating activities:
Stock-based compensation	1,127			599
Depreciation and amortization	42,280				53,182
Provision for doubtful accounts	722			641
Stock-based compensation	2,014				3,122
Amortization of debt premium and issuance costs	(1,020		)	(1,142		)
Provision for doubtful accounts	2,670				2,198
Gain (loss) on sale and disposal of fixed assets	(8		)	54
Amortization of debt discount, premium and issuance costs	2,015				(3,109		)
Other operating activities	(208		)	(200		)
(Gain) loss on sale of fixed assets	(187		)		710
(Increase) decrease in accounts receivable	(147		)	3,784
Write-off of unamortized debt discount and issuance cost	7,948				—
Increase in prepaid expenses and other assets	(5,340		)	(1,774		)
Other operating activities	—				(623		)
Increase in accounts payable and accrued and other liabilities	10,836			6,712
Increase in accounts receivable	(2,003		)		(4,061		)
Increase in deferred revenue	3,572			85
Increase in prepaid expenses and other assets	(1,522		)		(13,398		)
Net cash provided by operating activities	20,602			24,646
Increase in accounts payable and accrued and other liabilities	14,764				7,582
Cash flows from investing activities:
(Decrease) increase in deferred revenue	(522		)		4,857
Purchase of business, net of cash acquired	(22,127		)	—
Net cash provided by operating activities	58,632				37,329
Purchases of property and equipment	(13,649		)	(14,577		)
Cash flows from investing activities:
Proceeds received from sale of fixed assets	8			—
Purchase of business, net of cash acquired	—				(22,859		)
Change in restricted cash	458			718
Purchases of property and equipment	(44,574		)		(35,062		)
Other investing activities	(11		)	1
Proceeds received from sale of fixed assets	650				—
Net cash used in investing activities	(35,321		)	(13,858		)
Proceeds from sale of investments	1,706				—
Cash flows from financing activities:
Change in restricted cash	(1		)		489
Proceeds from issuance of stock	30,000			—
Other investing activities	(434		)		248
Repayment of long-term debt and capital lease obligations	(3,238		)	(99		)
Net cash used in investing activities	(42,653		)		(57,184		)
Net cash provided by (used in) financing activities	26,762			(99		)
Cash flows from financing activities:
Net increase in cash and cash equivalents	12,043			10,689
Proceeds from issuance of stock	—				30,000
Cash and cash equivalents, beginning of period	43,585			34,930
Proceeds from issuance of debt, net of issuance cost	308,220				—
Cash and cash equivalents, end of period	$	55,628		$	45,619
Repayment of long-term debt and capital lease obligations	(308,075		)		(3,564		)
Taxes paid on vested restricted shares	(2,112		)		—
Other financing activities	—				50
Net cash (used in) provided by financing activities	(1,967		)		26,486
Net increase in cash and cash equivalents	14,012				6,631
Cash and cash equivalents, beginning of period	67,786				43,585
Cash and cash equivalents, end of period	$	81,798			$	50,216

The accompanying notes are an integral part of these financial statements.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1. Organization

ITC^DeltaCom, Inc. (“ITC^DeltaCom” or the “Company”), together with its wholly-owned subsidiaries, provides integrated communications services in the southeastern United States. The Company ~~delivers~~provides a ~~comprehensive~~broad ~~suite~~range of ~~high-quality~~ data and voice communications services to business customers, including high-speed or broadband data communications, local exchange, long-distance ~~and conference calling~~, mobile data and voice and equipment services. ~~and~~The ~~customer~~Company ~~premises~~also ~~equipment~~sells transmission capacity to ~~businesses~~other ~~and~~communications ~~enterprise~~providers ~~organizations~~on a wholesale basis. The Company offers these services primarily over its ~~14-state~~regional fiber optic network. ~~The Company’s fiber optic network provides the Company with transmission capacity that it also sells to other communications providers on a wholesale basis.~~

On December 8, 2010, ITC^DeltaCom was acquired by EarthLink, Inc. (“EarthLink”) with ITC^DeltaCom, Inc. becoming a wholly-owned subsidiary of EarthLink, Inc. (the “Acquisition”). The accounting for the Acquisition ~~has~~was ~~been~~ “pushed-down” in the accompanying condensed consolidated financial statements. ~~See Note 3, “Acquisitions,” for more detail.~~

2. Summary of Significant Accounting Policies

Basis of Presentation

The condensed consolidated financial statements of ITC^DeltaCom for the three ~~and nine~~ months ended ~~September~~March 3031, 2011 and 2012 and the related footnote information are unaudited and have been prepared on a basis consistent with the Company’s audited consolidated financial statements as of December 31, ~~2010~~2011 contained in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “Annual Report”).

These financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto contained in the Company’s Annual Report. In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments), which management considers necessary to present fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The results of operations for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2011~~2012 are not necessarily indicative of the results anticipated for the entire year ending December 31, ~~2011~~2012.

Basis of Consolidation

The accompanying condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results may differ from those estimates.

Segment Disclosure

The Company operates in one segment.

Reclassifications

Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Predecessor and Successor Accounting

As a result of the Acquisition, certain of ITC^DeltaCom’s predecessor accounting policies were changed to conform to EarthLink’s current accounting policies. These changes did not have a significant impact on ITC^DeltaCom’s consolidated financial statements. The accounting for the Acquisition has been pushed-down to reflect the assets acquired and liabilities assumed at Acquisition date fair value. Accordingly, the Company’s financial position and results of operations may not be comparable between the accompanying Successor and Predecessor periods.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance related to fair value measurements. This guidance was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. This guidance also changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In June 2011, the FASB issued authoritative guidance related to comprehensive income. This guidance was issued to increase the prominence of items reported in other comprehensive income and requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In addition, reclassification adjustments for items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements where the components of net income and the components of other comprehensive income are presented. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

In September 2011, the FASB issued authoritative guidance related to goodwill testing. This guidance allows an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This guidance is effective for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

3. Acquisitions

~~Acquisition~~Saturn byTelecommunication ~~EarthLink~~Services, Inc.

OnIn ~~December~~March 82011, ~~2010,~~ the Company ~~was~~ acquired bySaturn ~~EarthLink,~~ Telecommunication Services Inc. ~~for~~and ~~$3.00~~affiliates ~~per~~(“STS ~~share.~~Telecom”), ~~Under~~a ~~the~~privately-held ~~terms~~provider of ~~the~~IP ~~merger~~communication ~~agreement,~~and ~~EarthLink~~information ~~acquired~~technology ~~100%~~services ofto ~~ITC^DeltaCom~~small inand amedium-sized ~~merger~~businesses ~~transaction~~primarily ~~with~~in ~~ITC^DeltaCom~~Florida. ~~surviving~~STS asTelecom operates a ~~wholly~~sophisticated voice-~~owned~~over-Internet-protocol ~~subsidiary~~(“VoIP”) platform. The primary reason for the acquisition was for the Company to leverage STS Telecom’s expertise in managed hosted VoIP as part of ~~EarthLink~~the Company’s VoIP offerings.

The total consideration transferred was $~~253~~22.89 million, which consisted of ~~$251.4 million in~~ cash paid to acquire the outstanding ~~common~~equity ~~stock~~interests of ~~ITC^DeltaCom~~STS ~~and $2~~Telecom.3 ~~million for the fair value of restricted stock units assumed and converted.~~ In allocating the consideration transferred based on estimated fair values, ~~ITC^DeltaCom~~ the Company recorded approximately $~~173~~21.73 million of goodwill, $~~131~~17.29 million of identifiable intangible assets, $2.8 million of tangible assets and $19.1 million of net liabilities assumed. The Company has included the financial results of STS Telecom in its consolidated financial statements from the date of acquisition. Pro forma financial information for STS Telecom has not been presented, as the effects were not material to the Company’s condensed consolidated financial statements.

Acquisition and Integration-Related Costs

Acquisition and integration-related costs consist of transaction-related costs, which are external costs directly related to acquisitions, such as advisory, legal, accounting, valuation and other professional fees; severance and retention costs directly related to acquisitions; and integration-related costs directly related to acquisitions, such as system conversion, rebranding costs and integration related consulting and employee costs. Acquisition and integration-related costs are expensed in the period in which the costs are incurred and the services are received and are included in acquisition and integration-related costs in the Condensed Consolidated Statements of Comprehensive Loss. Acquisition and integration-related costs consisted of the following during the three months ended March 31, 2011 and 2012:

	Three Months Ended
	March 31,
	2011		2012
	(in thousands)

Transaction-related costs	$	176	$	—
Severance and retention costs	649		263
Integration-related costs	—		11
Total acquisition and integration-related costs	$	825	$	274

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

assets, $199.3 million of property and equipment, $351.2 million of long-term debt, $15.5 million of other net assets and an $85.3 million reduction of additional paid-in capital. The reduction in additional paid-in capital resulted from a valuation allowance being reported for an increase in deferred tax assets in ITC^DeltaCom’s financial statements, but not in the consolidated financial statements of EarthLink. The accounting for the Acquisition was pushed-down to reflect the Acquisition at fair value of the assets acquired and liabilities assumed. The Company allocated the consideration transferred to the tangible assets, liabilities and intangible assets acquired based on their estimated fair values. The excess of the consideration transferred over those fair values was recorded as goodwill.

During the nine months ended September 30, 2011, the Company finalized certain provisional amounts recognized at the acquisition date related to deferred taxes and other tax positions. The Company retrospectively adjusted the provisional amounts recorded at the acquisition date to reflect finalization of provisional accounting. As a result, the carrying amount of additional paid-in capital was reduced by $18.8 million as of December 31, 2010, with a corresponding decrease to goodwill. The reduction in additional paid-in capital resulted from a valuation allowance being reported for an increase in deferred tax assets in ITC^DeltaCom’s financial statements, but not in the consolidated financial statements of EarthLink. During the nine months ended September 30, 2011, the Company recorded $3.5 million of goodwill adjustments from adjustments in the fair value of assets and liabilities assumed that were not deemed material to retrospectively adjust provisional amounts recorded at the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to income taxes and residual goodwill.

In connection with the acquisition, ITC^DeltaCom’s outstanding $325.0 million aggregate principal amount of 10.5% senior secured notes due 2016 (the “Notes”) were recorded at acquisition date fair value, which was based on publicly-quoted market prices. The resulting debt premium of $26.3 million is being amortized over the remaining life of the Notes. The Notes were not repaid or guaranteed by EarthLink and remain obligations of ITC^DeltaCom. Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. The remaining Notes remain outstanding as obligations of ITC^DeltaCom and its subsidiaries following the Acquisition.

Saturn Telecommunication Services, Inc.

In March 2011, the Company acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom currently operates a sophisticated voice-over-Internet-protocol (“VoIP”) platform. The primary reason for the acquisition was for the Company to leverage STS Telecom’s expertise in managed hosted VoIP on a nationwide basis as part of its VoIP offerings.

The total consideration transferred was $22.9 million, which consisted of cash paid to acquire the outstanding equity interests of STS Telecom. In allocating the consideration transferred based on estimated fair values, the Company recorded approximately $21.5 million of goodwill, $17.9 million of identifiable intangible assets, $2.8 million of tangible assets and $19.3 million of net liabilities assumed. The preliminary allocation of the consideration transferred was based upon a preliminary valuation and the Company’s estimates and assumptions are subject to change. The primary areas of the purchase price allocation that are not yet finalized relate to income and non-income based taxes and residual goodwill. The Company has included the financial results of STS Telecom in its consolidated financial statements from the date of acquisition. Pro forma financial information for STS Telecom has not been presented, as the effects were not material to the Company’s consolidated financial statements.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Acquisition-Related Costs

Acquisition-related costs consist of costs directly related to acquisitions, such as employee severance and retention costs; transaction related costs, which include external costs directly related to acquisitions such as advisory, legal, accounting, valuation and other professional fees; and other integration related costs. Acquisition-related costs consisted of the following during the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended				Nine Months Ended
	Predecessor		Successor		Predecessor		Successor
	Entity		Entity		Entity		Entity
	September 30,		September 30,		September 30,		September 30,
	2010		2011		2010		2011
Severance and retention costs	$	—	$	1,530	$	—	$	2,748
Transaction related costs	2,064		—		2,064		176
Integration related costs	—		134		—		622
Total acquisition-related costs	$	2,064	$	1,664	$	2,064	$	3,546

4. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 were as follows (in thousands):

Balance as of December 31, 2010
Balance as of December 31, 2011
Goodwill	$	~~170~~194,~~126~~761
Accumulated impairment loss	—
	170,126
	194,761
Goodwill acquired during year	21,551
Goodwill adjustments	(71		)
Goodwill adjustments	3,552
Balance as of March 31, 2012
Balance as of September 30, 2011
Goodwill	194,690
Goodwill	195,229
Accumulated impairment loss	—
	$	~~195~~194,~~229~~690

Goodwill ~~acquired during the period resulted from the Company’s acquisition of STS Telecom, which is more fully described in Note 3, “Acquisitions.” Goodwill~~ adjustments during the ~~period~~year resulted from adjustments in the fair value of assets and liabilities assumed in ~~acquisitions~~the acquisition of STS Telecom that were not deemed material to retrospectively adjust provisional amounts recorded at the acquisition date, which related to income and non-income based taxes.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Other Intangible Assets

The ~~following~~gross ~~table~~carrying ~~presents~~value ~~the~~and ~~components~~accumulated ofamortization ~~the~~by ~~Company’s~~major ~~acquired identifiable~~ intangible ~~assets~~asset ~~included~~category ~~in the accompanying Condensed Consolidated Balance Sheets~~ as of December 31, ~~2010~~2011 and ~~September~~March 3031, ~~2011~~2012 ~~(in~~were ~~thousands)~~as follows:

	As of December 31, 2010							As of September 30, 2011
	As of December 31, 2011							As of March 31, 2012
	Gross					Net		Gross					Net
	Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
	Value		Amortization			Value		Value		Amortization			Value
Customer relationships	$	117,600	$	(1,358	)	$	116,242	$	133,300	$	(18,157	)	$	115,143
	(in thousands)
Developed technology	9,900		(110		)	9,790		11,600		(1,888		)	9,712
Customer relationships	$	133,300	$	(23,901	)	$	109,399	$	133,300	$	(29,646	)	$	103,654
Trade name	3,700		(82		)	3,618		3,700		(1,007		)	2,693
Developed technology	11,600		(2,568		)	9,032		11,600		(3,248		)	8,352
Other	—		—			—		450		(105		)	345
Trade name	3,700		(1,316		)	2,384		3,700		(1,624		)	2,076
	$	131,200	$	(1,550	)	$	129,650	$	149,050	$	(21,157	)	$	127,893
Other	450		(150		)	300		450		(195		)	255
	$	149,050	$	(27,935	)	$	121,115	$	149,050	$	(34,713	)	$	114,337

The gross carrying value of identifiable intangible assets as of September 30, 2011 includes $15.7 million of customer relationships, $1.7 million of developed technology and $0.5 million of other intangible assets resulting from the STS Telecom acquisition. Customer relationships represent the fair values of the underlying relationships and agreements with the Company’s customers. Developed technology represents the fair values of the Company’s processes, patents and trade secrets related to the design and development of the Company’s internally used software and technology. Trade name represents the fair ~~values~~value of brand and name recognition. Other represents the fair value of non-compete agreements.

~~As of September 30, 2011, the weighted average amortization periods were 5.8 years for customer relationships, 5.~~6 years for developed technology, 3.0 years for the trade name and 2.5 years for other identifiable intangible assets. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such assets, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.

Amortization of intangible assets, which is included in depreciation and amortization in the Condensed Consolidated Statements of Operations, for the three and nine months ended September 30, 2010 and 2011 was as follows:

	Three Months Ended				Nine Months Ended
	Predecessor		Successor		Predecessor		Successor
	Entity		Entity		Entity		Entity
	September 30,		September 30,		September 30,		September 30,
	2010		2011		2010		2011
Amortization expense	$	635	$	6,809	$	1,905	$	19,638

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $6.8 million in the remaining three months in the year ending December 31, 2011 and $26.9 million, $25.9 million, $24.6 million, $24.3 million, $18.9 million and $0.4 million during the years ending December 31, 2012, 2013, 2014, 2015 and 2016 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of asset acquisitions, changes in estimated useful lives and other relevant factors.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

As of March 31, 2012, the weighted average amortization periods were 5.8 years for customer relationships, 5.3 years for developed technology, 3.0 years for the trade name and 2.5 years for other identifiable intangible assets. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such assets, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.

Amortization expense for definite-lived intangible assets was $6.1 million and $6.8 million during the three months ended March 31, 2011 and 2012, respectively. Amortization of definite-lived intangible assets is included in depreciation and amortization in the Condensed Consolidated Statements of Comprehensive Loss.

Based on the current amount of definite-lived intangible assets, the Company expects to record amortization expense of approximately $20.2 million during the remaining nine months ending December 31, 2012 and $25.9 million, $24.6 million, $24.3 million, $18.9 million and $0.4 million during the years ending December 31, 2013, 2014, 2015 and 2016 and thereafter, respectively. Actual amortization expense to be reported in future periods could differ materially from these estimates as a result of asset acquisitions, changes in estimated useful lives and other relevant factors.

5. Long-Term Debt and Capital Lease Obligations

~~The Company’s long~~Long-term debt and capital lease obligations consisted of the following as of December 31, ~~2010~~2011 and ~~September~~March 3031, ~~2011~~2012:

	As of			As of
	December 31,			~~September~~March 3031,
	2010			2011
	2011			2012
	(in thousands)
Senior secured notes due April 1, 2016	$	~~325~~324,~~000~~800		$	324,800
Unamortized premium on senior secured notes due April 1, 2016	2622,~~251~~056			2320,~~143~~914
Capital lease obligations	—927			~~1,250~~829
Carrying value of debt and capital lease obligations	~~351~~347,~~251~~783			~~349~~346,~~193~~543
Less current portion of long-term debt and capital lease obligations	—(419		)	(~~607~~336		)
Long-term debt and capital lease obligations	$	~~351~~347,~~251~~364		$	~~348~~346,~~586~~207

Senior Secured Notes due April 1, 2016

General. In April 2010, ITC^DeltaCom issued $325.0 million aggregate principal amount of 10.5% senior secured notes due on April 1, 2016 (the “Notes”) at an offering price of 97.857% and received net proceeds of $308.5 million after transaction fees of $9.5 million. In July 2010, the Company completed an exchange offer and exchanged the Notes for an identical series of Notes registered with the Securities and Exchange Commission. ~~The~~As ~~Company~~a ~~applied~~result ~~the~~of ~~net~~purchase ~~proceeds~~accounting toin ~~repay~~the ~~$305.5~~Acquisition, ~~million~~the ~~aggregate~~Notes ~~amount~~were ofrecorded ~~indebtedness,~~at ~~including~~acquisition ~~all~~date ~~principal~~fair ~~plus~~value. ~~accrued~~The ~~and~~fair ~~unpaid~~value ~~interest,~~was ~~outstanding~~based ~~under~~on ~~its~~publicly-quoted ~~first~~market ~~lien~~prices. ~~and~~The ~~second~~resulting ~~lien~~debt ~~senior~~premium ~~secured~~is ~~credit~~being ~~facilities~~amortized ~~and~~over ~~its~~the ~~former~~remaining ~~revolving~~life ~~credit~~of ~~facility,~~the ~~which~~Notes ~~were~~using ~~terminated~~the effective interest method.

Under the indenture for the Notes, following the consummation of the Acquisition, ITC^DeltaCom was required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 2010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011 and approximately $324.8 million outstanding principal amount of the Notes remain outstanding.

The Notes accrue interest at a rate of 10.5% per year. Interest on the Notes is payable semi-annually in cash in arrears on April 1 and October 1 of each year. The Notes ~~will~~ mature on April 1, 2016. As a result of purchase accounting, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting debt premium is being amortized over the remaining life of the Notes.

Redemption. ITC^DeltaCom may redeem some or all of the Notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a “make-whole” premium. ITC^DeltaCom may redeem some or all of the Notes at any time on or after April 1, 2013, at specified redemption prices declining from 105.250% to 100% of their principal amount. In addition, before April 1, 2013, ITC^DeltaCom may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 110.5% of their principal amount with the net proceeds of certain equity offerings. During any 12-month period before April 1, 2013, ITC^DeltaCom may redeem up to 10% of the aggregate principal amount of the Notes at a redemption price equal to 103% of their principal amount. If (1) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the senior secured revolving credit facility, the Notes, or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business, or (2) ITC^DeltaCom experiences a change of control, it may be required to offer to purchase Notes from holders at 100% of their principal amount, in the case of a sale of assets, or 101% of their principal amount, in the case of a change of control. ITC^DeltaCom would be required to pay accrued and unpaid interest, if any, on the Notes redeemed or purchased in each of the foregoing events of redemption or purchase.7

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

Redemption. ITC^DeltaCom may redeem some or all of the Notes, at any time before April 1, 2013, at a redemption price equal to 100% of their principal amount plus a “make-whole” premium. ITC^DeltaCom may redeem some or all of the Notes at any time on or after April 1, 2013, at specified redemption prices declining from 105.250% to 100% of their principal amount. In addition, before April 1, 2013, ITC^DeltaCom may redeem up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 110.5% of their principal amount with the net proceeds of certain equity offerings. During any 12-month period before April 1, 2013, ITC^DeltaCom may redeem up to 10% of the aggregate principal amount of the Notes at a redemption price equal to 103% of their principal amount. If (1) ITC^DeltaCom sells certain of its assets and does not either (a) apply the net sale proceeds to repay indebtedness under the senior secured revolving credit facility, the Notes or other indebtedness secured on a first-priority basis or (b) reinvest the net sale proceeds in its business or (2) ITC^DeltaCom experiences a change of control, it may be required to offer to purchase Notes from holders at 100% of their principal amount, in the case of a sale of assets, or 101% of their principal amount, in the case of a change of control. ITC^DeltaCom would be required to pay accrued and unpaid interest, if any, on the Notes redeemed or purchased in each of the foregoing events of redemption or purchase.

Ranking and guaranty. The Notes are ITC^DeltaCom’s general senior obligations and rank equally in right of payment with any future senior indebtedness. The Notes are secured on a first-priority basis, along with any future pari passu secured obligations, subject to specified exceptions and permitted liens, by substantially all of the assets of ITC^DeltaCom and its subsidiaries that are deemed to be restricted subsidiaries under the indenture governing the Notes. Currently all of ITC^DeltaCom subsidiaries are deemed to be restricted subsidiaries under the indenture. The Notes are guaranteed on a senior secured basis by each of ITC^DeltaCom’s restricted subsidiaries on the initial issue date of the Notes and will be guaranteed on a senior secured basis by each future domestic restricted subsidiary, other than certain excluded subsidiaries, and by any foreign restricted subsidiary that guarantees any indebtedness of ITC^DeltaCom or any domestic restricted subsidiary. The guarantees are the subsidiary guarantors’ general senior obligations and rank equally in right of payment with all of the subsidiary guarantors’ existing and future senior indebtedness.

The subsidiary guarantors are wholly owned, directly or indirectly, by ITC^DeltaCom, Inc. and have, jointly and severally, fully and unconditionally guaranteed, to each holder of the Notes, the full and prompt performance of ITC^DeltaCom’s obligations under the Notes and the indenture governing the Notes, including the payment of principal (or premium, if any) and interest on the Notes, on an equal and ratable basis. Further, ITC^DeltaCom has no independent assets or operations, and there are no significant restrictions on the ability of its consolidated subsidiaries to transfer funds to ITC^DeltaCom in the form of cash dividends, loans or advances. ITC^DeltaCom’s assets consist solely of cash representing less than 1% of consolidated assets and investments it has made in its consolidated subsidiaries, and its operations consist solely of changes in its investment in subsidiaries and interest associated with the senior indebtedness. Based on these facts, and in accordance with Securities and Exchange Commission Regulation S-X Rule 3-10, “Financial statements of guarantors and issuers of guaranteed securities registered or being registered,” ITC^DeltaCom is not required to provide condensed consolidating financial information for the subsidiary guarantors.

Covenants. The indenture governing the Notes contains covenants that, among other things, limit ITC^DeltaCom’s ability, and the ability of ITC^DeltaCom’s restricted subsidiaries, to incur additional indebtedness, create liens, pay dividends on, redeem or repurchase ITC^DeltaCom’s capital stock, make investments or repay subordinated indebtedness, engage in sale-leaseback transactions, enter into transactions with affiliates, sell assets, create restrictions on dividends and other payments to ITC^DeltaCom from its subsidiaries, issue or sell stock of subsidiaries, and engage in mergers and consolidations. All of the covenants are subject to a number of important qualifications and exceptions under the indenture. As of December 31, ~~2010~~2011 and ~~September~~March 3031, ~~2011~~2012, the Company was in compliance with all of its ~~financial~~ covenants.

Fair value. As of December 31, ~~2010~~2011 and ~~September~~March 3031, ~~2011~~2012, the fair value of the ITC^DeltaCom Notes was approximately $~~352~~320.6 million and $~~328~~341.09 million, respectively, based on quoted market prices in active markets.

~~Capital Leases~~8

The Company leases certain equipment that is accounted for as capital leases. All of these capital leases were assumed by the Company through its acquisition of STS Telecom. Depreciation expense related to assets under capital leases is included in depreciation and amortization expense.

6. Equity

In March 2011, ITC^DeltaCom issued 100 shares of Common Stock, par value $0.01 per share, to EarthLink for $30.0 million in cash pursuant to a stock subscription agreement.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

~~7. Income~~Capital ~~Taxes~~Leases

The ~~income~~Company ~~tax~~leases ~~provision~~certain ~~for~~equipment ~~the~~that ~~nine~~is ~~months~~accounted ~~ended~~for ~~September 30,~~as ~~2011~~capital ~~represents an effective rate of -2~~leases.~~29%.~~ ~~The~~Depreciation ~~income~~expense ~~tax~~related ~~provision consisted of state income amounts payable due~~ to ~~the~~assets ~~net~~under ~~operating~~capital ~~loss~~leases ~~carryforward~~is ~~limitations~~included ~~associated~~in ~~with~~depreciation ~~provisions~~and ofamortization ~~the~~expense ~~Internal Revenue Code which limit an entity’s ability to utilize net operating loss carryforwards~~ in the ~~case~~Condensed ofConsolidated ~~certain~~Statements ~~events,~~of ~~including~~Comprehensive ~~significant changes in ownership interests~~Loss.

~~The Company’s income tax provision is prepared on a stand-alone basis, including the determination of the need for a valuation allowance~~6. ~~For~~ ~~federal~~Income income tax purposes, the Company will be filing a consolidated income tax return with EarthLink, its parent company. For state income tax purposes, the Company will be filing on a combined or consolidated basis where required or allowable by law. The Company’s tax attributes are presented as if the Company files a separate return for federal and state tax purposes. The Company’s attributes used by EarthLink are presented as if they were unused on a separate company basis.Taxes

~~EarthLink~~The ~~has~~major ~~determined~~components ~~that~~of itthe isincome ~~not necessary to report a valuation allowance for deferred~~ tax ~~assets~~provision onduring ~~a consolidated basis. However, it is necessary to report a valuation allowance in~~ the ~~separate~~three ~~financial~~months ~~statements~~ended ofMarch 31, ~~ITC^DeltaCom.~~2011 ~~The~~and ~~difference~~2012 inare ~~valuation~~as ~~allowance in ITC^DeltaCom’s financial statements has been recorded to stockholders’ equity.~~follows:

The Company will reduce the valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets can be realized on a stand-alone basis. Provisions of the Internal Revenue Code limit an entity’s ability to utilize net operating loss carryforwards in the case of certain events, including significant changes in ownership interests.

	Three Months Ended
	March 31,
	2011			2012
	(in thousands)
State income tax	$	287		$	124
Current provision	287			124

Deferred benefit	(1,749		)	(487		)
Change in valuation allowance	1,749			487
Deferred benefit	—			—

Total	$	287		$	124

AsThe ~~part~~income oftax ~~the~~provision ~~acquisition~~for ofthe ~~ITC^DeltaCom~~three bymonths ~~EarthLink~~ended March 31, ~~$17.6~~2012 ~~million~~represents ofan ~~unrecognized~~annual ~~tax~~effective ~~benefits,~~rate ~~including $0.1 million~~ of ~~accrued interest and penalties, were identified~~-9. ~~Of this amount, $15~~42%.9 ~~million~~The ~~would~~current ~~reduce~~state ~~prior~~tax ~~net~~provision ~~operating~~recorded ~~losses~~during ~~if assessed. Of~~ the ~~$1.7~~three ~~million~~months ~~reflected~~ended onMarch 31, ~~the~~2011 ~~opening~~and ~~balance sheet~~March 31, ~~$1.3~~2012 ~~million~~was ~~would~~the result inof ~~tax~~limitations ~~payments,~~on ~~$0.3 million would be offset by~~ net operating ~~losses~~loss ~~and~~utilization ~~$0.1~~associated ~~million~~with ~~relates~~state ~~to interest and penalties as disclosed below~~laws.

The Company’s ~~policy~~income tax provision is toprepared ~~classify~~on ~~interest~~a ~~and~~stand-alone ~~penalties~~basis, ~~related~~including tothe ~~unrecognized~~determination of the need for a valuation allowance. For federal income tax ~~benefits~~purposes, inthe Company files a consolidated income tax ~~expense~~return with EarthLink, its parent company. For Asstate ofincome ~~September 30,~~tax ~~2011~~purposes, the Company ~~had~~files $0on a combined or consolidated basis where required or allowable by law.2 ~~million~~The accounting for the Acquisition has been pushed-down in the consolidated financial statements, including the recording of ~~interest~~deferred ~~and~~tax ~~penalties~~assets. EarthLink has determined that it is not necessary to report a valuation allowance for deferred tax assets on a consolidated basis. However, it is necessary to report a valuation allowance in the separate financial statements of ITC^DeltaCom. The difference in valuation allowance in ITC^DeltaCom’s financial statements is recorded to stockholders’ equity.

8The Company will reduce the valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will be realized. ~~Related~~ ~~Party~~Provisions ~~Transactions~~of the Internal Revenue Code limit an entity’s ability to utilize net operating loss carryforwards in the case of certain events, including significant changes in ownership interests.

~~ITC^DeltaCom~~The Company has aidentified ~~services~~its ~~agreement~~federal ~~with~~tax ~~EarthLink~~return ~~pursuant~~and toits ~~which~~state ~~EarthLink~~tax ~~provides~~returns ~~ITC^DeltaCom certain support services~~ in ~~exchange~~Alabama, ~~for~~Florida, ~~management~~Georgia and ~~fees.~~North ~~The~~Carolina ~~management~~as ~~fees~~material ~~were~~tax ~~determined~~jurisdictions, ~~based~~for onpurposes ~~EarthLink’s~~of ~~costs~~calculating toits ~~provide~~uncertain ~~the~~tax ~~services~~positions. ~~During~~Periods ~~the~~extending ~~three~~back ~~and~~to ~~nine~~1994 ~~months~~are ~~ended~~still ~~September 30,~~subject ~~2011, ITC^DeltaCom~~to ~~recognized~~examination ~~$0.3 million and $1.1 million, respectively, of operating expenses~~ for ~~services~~all ~~received~~material ~~from EarthLink~~jurisdictions.

As part of ~~December 31,~~the ~~2010~~Acquisition, ~~the~~$17.6 ~~Company~~million ~~had~~of ~~accounts~~uncertain ~~receivable~~tax ~~from~~positions, ~~EarthLink~~including $0.1 million of ~~approximately~~accrued interest and penalties, were identified. Of this amount, $115.29 million. Aswould ofreduce ~~September 30,~~prior ~~2011,~~net operating losses if assessed. Of the ~~Company~~$1.7 ~~had~~million ~~accounts~~reflected ~~receivable~~on ~~from~~the ~~EarthLink~~balance ~~and~~sheet, ~~its~~$1.3 ~~subsidiaries~~million ofwould ~~approximately~~result in tax payments and $0.4 million would be offset by net operating losses. There were no changes to the amount of unrecognized tax benefits during the three months ended March 31, 2012.

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ITC^DELTACOM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED - (Continued)

9Of the total uncertain tax positions, none is expected to reverse within the next twelve months. ~~Commitments~~ The Company’s policy is to classify interest and ~~Contingencies~~penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2011 and March 31, 2012, the Company had $0.2 million of interest recorded.

7. Related Party Transactions

ITC^DeltaCom has a services agreement with EarthLink pursuant to which EarthLink and its subsidiaries provide ITC^DeltaCom certain support services in exchange for management fees. In addition, ITC^DeltaCom provides EarthLink and its subsidiaries certain support services in exchange for management fees. The management fees were determined based on the costs to provide such services. Net operating expenses for services received from and provided to EarthLink were $0.5 million and $0.4 million during the three months ended March 31, 2011 and 2012, respectively.

As of December 31, 2011, the Company had accounts receivable from EarthLink and its subsidiaries of approximately $0.9 million. As of March 31, 2012, the Company had accounts receivable from EarthLink and its subsidiaries of approximately $0.6 million.

8. Commitments and Contingencies

Legal proceedings

The Company is party to various legal proceedings arising from normal business activities. The result of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. The Company’s management, however, believes that there are no disputes, litigation or other legal proceedings asserted or pending against the Company that could have, individually or in the aggregate, a material adverse effect on its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in the Company’s condensed consolidated financial statements.

Regulation

The Company’s services are subject to varying degrees of federal, state and local regulation. These regulations are subject to ongoing proceedings at federal and state administrative agencies or within state and federal judicial systems. Results of these proceedings could change, in varying degrees, the manner in which the Company operates. The Company cannot predict the outcome of these proceedings or their effect on the Company’s industry generally or upon the Company specifically.

Other

The Company is periodically involved in disputes related to its billings to other carriers for access to its network. The Company does not recognize revenue related to such matters until the period that it is reliably assured of the collection of these claims. In the event that a claim is made related to revenues previously recognized, the Company assesses the validity of the claim and adjusts the amount of revenue being recognized to the extent that the claim adjustment is considered probable and estimable.

The Company periodically disputes network access charges that it is assessed by other companies with which the Company interconnects. The Company maintains adequate reserves for anticipated exposure associated with these billing disputes. The reserves are reviewed on a monthly basis, but are subject to changes in estimates and management judgment as new information becomes available. In view of the length of time historically required to resolve these disputes, they may be resolved or require adjustment in future periods and relate to costs invoiced, accrued or paid in prior periods.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. The words “estimate,” “plan,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report. ITC^DeltaCom disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although ITC^DeltaCom believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ from estimates or projections contained in the forward-looking statements are described under “Safe Harbor Statement” in this Item 2.

The following discussion should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited Consolidated Financial Statements and the Notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011.

Overview

ITC^DeltaCom, Inc., together with its ~~wholly-owned~~consolidated subsidiaries, provides integrated communications services in the southeastern United States. We ~~deliver~~provide a ~~comprehensive~~broad ~~suite~~range of ~~high-quality~~ data and voice communications services to business customers, including high-speed or broadband data communications, local exchange, long-distance ~~and conference calling~~, ~~and~~ mobile data and voice ~~services to businesses~~ and ~~enterprise~~equipment ~~organizations~~services. We also sell ~~customer~~transmission ~~premises~~capacity ~~equipment~~ to ~~our~~other ~~business~~communications ~~customers~~providers on a wholesale basis. We offer these services primarily over our ~~14-state~~regional fiber optic network. ~~Our fiber optic network provides us with transmission capacity that we also sell to other communications providers on a wholesale basis.~~

In December 2010, we were acquired by EarthLink, Inc. (“EarthLink”) for $3.00 per share, with ITC^DeltaCom, Inc. surviving as a wholly-owned subsidiary of EarthLink (the “Acquisition”). Subsequent to the ~~acquisition~~Acquisition, our integrated communication services were rebranded as EarthLink Business and our wholesale services were rebranded as EarthLink Carrier, an EarthLink Business company.

Acquisition

On March 2, 2011, we acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated VoIP platform. The primary reason for the acquisition was to leverage STS Telecom’s expertise in managed hosted VoIP as part of our VoIP offerings.

Revenue Sources

We ~~derive~~provide ~~revenues~~a ~~from~~broad ~~providing~~range of data, voice and equipment services to businesses and communications carriers. We present our revenue in the following three categories: (1) retail services, which includes data, voice and mobile data and voice services provided to business customers; (2) wholesale services, which includes the sale of transmission capacity to other telecommunications carriers; and (3) other services, which includes the sale of customer premises equipment. ~~sales~~Our retail customers range from large enterprises with many locations, to small and ~~related~~medium-sized ~~services~~multi-site businesses, to business customers with one site. Our wholesale customers consist primarily of telecommunications carriers and network resellers. Revenues generally consist of monthly recurring fees; usage fees; installation fees; termination fees and equipment sales.

Retail Services. We deliver integrated voice and data communications services to end-users on a retail basis, including high-speed or broadband data communications, local exchange, long-distance and conference calling, voice-over-Internet Protocol (“VoIP”) and mobile data and voice services. Revenues primarily consist of monthly recurring fees. Revenues from our retail services were approximately 82% and 81% of our total revenues during the three months ended September 30, 2010 and 2011, respectively.11

Wholesale Services. We deliver wholesale communications services to other communications businesses. Revenues from these services are generated from sales to a limited number of other communications companies, including incumbent local exchange carriers, competitive local exchange carriers, wireless service providers, cable companies, Internet service providers and other carriers. Our wholesale services include regional communications transmission capacity over our fiber optic network, which we refer to as our “broadband transport” services, local interconnection services to Internet service providers and local dial tone communications services to other competitive exchange carriers, operator and directory assistance services, and dedicated Internet access services through our IP network and our direct connectivity to the IP networks of other Internet service providers. Our broadband transport services include private line services, Ethernet private line services and wavelength services, which allow other communications providers to transport the traffic of their end-user or wholesale customers across our local and intercity network. Revenues consist of fees charged for

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network services, termination fees, fees for equipment and usage fees. Revenues from our wholesale services were approximately 15% and 16% of our total revenues during the three months ended September 30, 2010 and 2011, respectively.

Other Services. We derive other revenues from selling, installing and providing maintenance services for customer premises equipment. Revenues from these services, which are primarily generated from sales to our integrated communications services customers, were approximately 4% and 3% of our total revenues during the three months ended September 30, 2010 and 2011, respectively.

Trends in our Business

We operate in the communications industry. The communications industry is highly competitive, and we expect this competition to intensify. These markets are rapidly changing due to industry consolidation, an evolving regulatory environment and the emergence of new technologies. WeMerger ~~sell~~and ~~our~~acquisition ~~services~~transactions tohave ~~end~~created ~~user~~more ~~business~~significant ~~customers~~competitors ~~and~~for tous ~~wholesale~~and ~~customers.~~have ~~Our~~reduced ~~wholesale~~the ~~customers~~number ~~consist~~of ~~primarily~~vendors offrom ~~telecommunications~~which ~~carriers~~we ~~and~~may purchase network ~~resellers~~elements we leverage to operate our business. InCertain ~~addition,~~of ~~merger~~our ~~and~~business ~~acquisition~~service ~~transactions~~revenues have ~~created~~been ~~more~~declining ~~significant~~due ~~competitors~~to ~~for~~competitive uspressures in the industry, and ~~have~~we ~~reduced~~expect ~~the~~revenues ~~number~~from certain aspects of ~~vendors~~these ~~from~~businesses ~~which~~to continue to decline. Specifically, we ~~may~~have ~~purchase~~experienced ~~network~~revenue ~~elements~~declines in voice lines and revenues. In addition, we ~~leverage~~expect revenues to ~~operate~~be ~~our~~adversely ~~business~~impacted as a result of new rules recently adopted by the FCC regarding intercarrier compensation.

Our business customers are particularly exposed to a weak economy. We believe that the financial and economic pressures faced by our business customers in this environment of diminished consumer spending, corporate downsizing and tightened credit have had, and may continue to have, an adverse effect on our results of operations, including longer sales cycles and increased customer demands for price reductions in connection with contract renewals. We have experienced pressure on revenue and operating expenses for our services as a result of current economic conditions, including increased subscriber acquisition and retention costs necessary to attract and retain subscribers.

~~Acquisition~~To counteract trends in our revenue, we are focused on building long-term customer relationships based a customizable communications portfolio using a blend of access technologies for connectivity and personalized customer service. However, we have and may continue to experience pressure on revenue and operating expenses for our business services as a result of competition, changes in technology or current economic conditions.

In March 2011, we acquired Saturn Telecommunication Services Inc. and affiliates (“STS Telecom”), a privately-held provider of IP communication and information technology services to small and medium-sized businesses primarily in Florida. STS Telecom operates a sophisticated VoIP platform. The primary reason for the acquisition is to leverage STS Telecom’s expertise in managed hosted VoIP on a nationwide basis as part of our VoIP offerings.

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Results of Operations

~~On December 8, 2010, we were acquired by EarthLink.~~ The ~~accounting~~following ~~for~~table ~~the~~sets ~~acquisition~~forth ~~has~~statement ~~been “pushed-down” in our consolidated financial statements. Due to EarthLink’s acquisition~~ of ~~us,~~operations ~~the~~data ~~financial results have been presented separately~~ for the ~~“Predecessor~~three ~~Entity”~~months ~~period,~~ended ~~January~~March 131, ~~2010~~2011 ~~through September 30, 2010,~~ and ~~for the “Successor Entity” period, January 1, 2011 through September 30, 2011.~~2012:

The following table sets forth statement of operations data for the three months ended September 30, 2010 and 2011 (in thousands):

	Three Months Ended March 31,
	2011			2012
	(in thousands)
Revenues:
Retail services	$	88,672		$	89,615
Wholesale services	17,568			19,015
Other services	3,576			3,325
Total revenues	109,816			111,955

Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shownseparately below)	54,378			54,540
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	35,704			33,615
Depreciation and amortization	16,666			17,329
Acquisition-related costs	825			274
Total operating costs and expenses	107,573			105,758

Income from operations	2,243			6,197
Interest expense and other, net	(7,554		)	(7,515		)
Loss before income taxes	(5,311		)	(1,318		)
Income tax provision	(287		)	(124		)
Net loss	$	(5,598	)	$	(1,442	)

	Predecessor Entity			Sucessor Entity
	Three Months			Three Months			Change Between
	Ended			Ended			2010 and 2011
	September 30, 2010			September 30, 2011			Amount			%
Revenues:
Retail services	$	90,466		$	92,260		$	1,794		2	%
Wholesale services	16,330			17,952			1,622			10	%
Other services	4,124			3,151			(973		)	-24	%
Total revenues	110,920			113,363			2,443			2	%
Operating costs and expenses:
Cost of revenues (exclusive of depreciation and amortization shownseparately below)	54,736			54,020			(716		)	-1	%
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	35,325			32,739			(2,586		)	-7	%
Depreciation and amortization	13,810			18,286			4,476			32	%
Acquisition-related costs	2,064			1,664			(400		)	-19	%
Total operating costs and expenses	105,935			106,709			774			1	%
Income from operations	4,985			6,654			1,669			33	%
Interest expense and other, net	(9,683		)	(7,687		)	1,996			-21	%
Loss before income taxes	(4,698		)	(1,033		)	3,665			-78	%
Income tax provision	—			(261		)	(261		)	*
Net loss	$	(4,698	)	$	(1,294	)	$	3,404		-72	%

* Denotes percentage is not meaningful.

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The following table sets forth ~~statement~~certain ofoperating ~~operations~~ data ~~for~~as ~~the~~of ~~nine months ended September~~March 3031, ~~2010~~2011 and ~~2011 (in thousands)~~2012:

	Predecessor Entity			Sucessor Entity
	March 31,		March 31,
	Nine Months			Nine Months			Change Between
	2011		2012
	Ended			Ended			2010 and 2011
Colocations (1)	294		299
	September 30, 2010			September 30, 2011			Amount			%
Voice and data switches	20		21
Revenues:
Employees (2)	1,325		1,146
Retail services	$	275,627		$	273,497		$	(2,130	)	-1	%
Retail business voice lines in service (3)
Wholesale services	45,900			53,100			7,200			16	%
UNE-T and other UNE lines (4)	373,927		372,170
Other services	11,433			10,361			(1,072		)	-9	%
Resale and UNE-P lines (5)	43,704		43,066
Total revenues	332,960			336,958			3,998			1	%
Total retail voice lines in service	417,631		415,236
Operating costs and expenses:
Wholesale lines in service (6)	6,831		5,359
Cost of revenues (exclusive of depreciation and amortization shownseparately below)	158,006			163,944			5,938			4	%
Total business lines in service (7)	424,462		420,595
Selling, general and administrative (exclusive of depreciation and amortization shown separately below)	108,908			105,745			(3,163		)	-3	%
Depreciation and amortization	42,280			53,182			10,902			26	%
Acquisition-related costs	2,064			3,546			1,482			72	%
Total operating costs and expenses	311,258			326,417			15,159			5	%
Income from operations	21,702			10,541			(11,161		)	-51	%
Interest expense and other, net	(30,527		)	(23,378		)	7,149			-23	%
Loss before income taxes	(8,825		)	(12,837		)	(4,012		)	45	%
Income tax provision	—			(294		)	(294		)	*
Net loss	$	(8,825	)	$	(13,131	)	$	(4,306	)	49	%

* Denotes percentage is not meaningful.

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The following table sets forth certain operating data as of September 30, 2010 and 2011:

	September 30,	September 30,
	2010	2011
Colocations (1)	294	298
Voice and data switches	20	20
Employees (2)	1,360	1,193
Retail business voice lines in service (3)
UNE-T and other UNE lines (4)	369,998	372,443
Resale and UNE-P lines (5)	44,425	43,277
Total retail voice lines in service	414,423	415,720
Wholesale lines in service (6)	6,923	5,612
Total business lines in service (7)	421,346	421,332

(1) Two colocations in the same physical facility are reflected as one location.

(2) Includes full-time and part-time employees.

(3) Lines in service include only voice lines in service. Conversion of data services provided to customers to a voice line equivalent is excluded.

(4) Facilities-based service offering in which we provide local transport through our owned and operated switching facilities.

(5) Resale service offerings in which we provide local and mobile services.

(6) Represents primary rate interface circuits provided as part of our local interconnection services for Internet service providers.

(7) Reported net of lines disconnected or canceled.

Revenues

~~Total~~The ~~revenues~~following ~~increased~~table ~~$2.4~~presents ~~million,~~revenues orby ~~2%,~~groups ~~from~~of ~~the~~similar ~~three~~services ~~months~~for ~~ended September 30, 2010 to~~ the three months ended ~~September~~March 3031, 2011, and increased $4.0 million, or 1%, from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. The increases were primarily due to the inclusion of STS Telecom revenues and an increase in wholesale revenues, offset by declining business demand and competitive pricing pressures for our retail integrated communications services and equipment.2012:

Retail services. Revenues from our retail services increased $1.8 million, or 2%, from the three months ended September 30, 2010 to the three months ended September 30, 2011. The increase was primarily due to the inclusion of STS Telecom revenues. This was partially offset by a decrease in local service revenues and data revenues. Our local service and data revenues decreased due to pricing pressures related to increased competition and the overall economy. Revenues from our retail services decreased $2.1 million, or 1%, from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. The decrease was primarily due to a decrease in local service revenues and data revenues, offset by the inclusion of STS Telecom revenues and an increase in long distance services revenue.

	Three Months Ended
	March 31,				Change
	2011		2012		Dollars			Percent
	(dollars in thousands)
Retail services	$	88,672	$	89,615	$	943		1	%
Wholesale services	17,568		19,015		1,447			8	%
Other services	3,576		3,325		(251		)	-7	%
Total revenues	$	109,816	$	111,955	$	2,139		2	%

17Retail services. The increase in revenues from our retail services during the three months ended March 31, 2012 compared to the prior year period was primarily attributable to the inclusion of STS Telecom revenues

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Wefor ~~experienced~~a anfull ~~increase~~period ofin ~~approximately~~2012 ~~2,445~~compared ~~facilities-based~~to ~~local~~a ~~lines~~partial ~~and~~period ain ~~decrease~~2011. The results of ~~approximately~~operations ~~1,148~~of ~~resale~~STS ~~and~~Telecom ~~UNE-P~~have ~~lines~~been ~~from~~included ~~September 30,~~since ~~2010~~the toacquisition ~~September~~date on March 302, 2011,. ~~for~~Also acontributing ~~net~~to the increase ofwas ~~1,297~~an ~~total~~increase ~~lines~~in data and Internet revenues. WeThis ~~continue~~was partially offset by a decrease in local service revenues due to ~~pursue~~competition in the industry and a ~~strategy~~decrease in carrier access billing revenues due to ~~improve~~new rules adopted by the ~~profitability~~FCC in November 2011 regarding intercarrier compensation. The new rules include the elimination of ~~our~~terminating ~~integrated~~switched ~~communications~~access ~~services~~rates and other per-minute terminating charges between service providers by ~~reducing~~2018, through annual reductions in the ~~proportion~~rates. ofRetail ~~our~~voice ~~local~~revenues and voice lines ~~provided~~in ~~through~~service ~~higher~~have ~~cost~~been ~~resale~~decreasing due to competition in the industry and ~~UNE-P~~customers migrating to more advanced services. We expect this trend to continue.

Wholesale services. ~~Revenues~~The increase in revenues from our wholesale services ~~increased~~during ~~$1.6 million, or 10%, from~~ the three months ended ~~September~~March 3031, ~~2010~~2012 tocompared ~~the three months ended September 30, 2011, and increased $7.2 million, or 16%, from the nine months ended September 30, 2010~~ to the ~~nine~~prior ~~months~~year ~~ended~~period ~~September 30,~~was ~~2011. The increases were~~ primarily attributable to an increase in broadband ~~transport~~capacity ~~services~~ revenues. ~~The~~and ~~increase~~voice ~~in broadband transport service~~ revenues. ~~resulted~~Partially ~~from~~offsetting ~~actions~~this onincrease ~~our~~was ~~part~~a todecrease ~~secure our customer relationships~~ in ~~which~~local weinterconnection ~~entered~~revenues ~~into~~resulting ~~new~~from ~~contracts~~a ~~with~~decrease ~~utilities to acquire facilities for our use~~ in ~~serving~~local ~~our~~interconnection ~~customers and canceled contracts with the utilities to market their facilities to our customers~~lines. ~~As a result, our broadband transport revenues and our cost of revenues increased during the three and nine months ended September 30, 2011 compared to the prior year periods.~~

Other services. The ~~Revenues~~decrease ~~from~~in ~~communication~~revenues ~~equipment~~from ~~sales~~other ~~and related~~ services ~~decreased~~during ~~$1.0 million, or 24%, from~~ the three months ended ~~September~~March 3031, ~~2010~~2012 tocompared ~~the three months ended September 30, 2011, and decreased $1.1 million, or 9%, from the nine months ended September 30, 2010~~ to the ~~nine~~prior ~~months~~year ~~ended~~period ~~September 30, 2011. The decreases~~ resulted from ~~reduced~~a ~~demand~~decrease ~~for~~in volume of telephone systems sold.

Cost of revenues

~~Cost~~The offollowing ~~revenues~~table ~~includes~~presents ~~costs~~cost ~~directly associated with providing services to our customers. Cost~~ of revenues does not include depreciation and amortization. Cost of revenues primarily consists of the cost of connecting customers to our networks via leased facilities; the costs of leasing components of our network facilities; costs paid to third-party providers for ~~interconnect access and transport services; and~~ the ~~costs~~three ofmonths ~~equipment~~ended ~~sold~~March 31, to2011 customers for use with our services. We utilize other carriers to provide services where we do not have facilities. We utilize a number of different carriers to terminate our long distance calls outside the southeastern United States. The provision of local services over our network generally reduces the amounts we otherwise would be required to pay to other telephone companies to use their networks and ~~facilities in order to provide local services.~~2012:

Total cost of revenues decreased $0.7 million, or 1%, from the three months ended September 30, 2010 to the three months ended September 30, 2011 and decreased as a percent of revenues from 49% during the three months ended September 30, 2010 to 48% during the three months ended September 30, 2011. The decrease in cost of revenues both in absolute terms and as a percentage of total revenues was primarily due to the release of reserves for certain network access charges that are no longer subject to dispute. Partially offsetting the decrease was the inclusion of STS Telecom cost of revenues and an increase in wholesale services cost of revenues resulting from new contracts, as discussed above.

	Three Months Ended
	March 31,				Change
	2011		2012		Dollars		Percent
	(dollars in thousands)

Cost of revenues	$	54,378	$	54,540	$	162	0	%

~~Total~~Cost ~~cost~~ of revenues ~~increased~~includes $5costs directly associated with providing services to our customers.9 ~~million,~~Cost orof ~~4%,~~revenues ~~from~~primarily ~~the~~consists ~~nine~~of ~~months~~the ~~ended~~cost ~~September 30,~~of ~~2010~~connecting customers to our networks via leased facilities; the ~~nine~~costs ~~months~~of ~~ended~~leasing ~~September 30,~~components ~~2011~~of ~~and~~our ~~increased~~network asfacilities; acosts ~~percent~~paid ofto ~~revenues~~third-party ~~from~~providers ~~47%~~for ~~during~~interconnect access and transport services; and the ~~nine~~costs ~~months~~of ~~ended~~equipment ~~September 30,~~sold ~~2010~~to customers. We utilize other carriers to ~~49%~~provide ~~during~~services ~~the~~where ~~nine~~we ~~months~~do ~~ended~~not ~~September 30,~~have ~~2011~~facilities. ~~The~~We ~~increase~~utilize ina ~~cost~~number of ~~revenues~~different ~~both~~carriers into ~~absolute~~terminate ~~terms~~our ~~and~~long asdistance acalls ~~percentage~~outside the southeastern United States. The provision of ~~total~~local ~~revenues~~services ~~was~~over ~~primarily~~our ~~due~~network togenerally reduces the ~~inclusion~~amounts ofwe ~~STS~~otherwise ~~Telecom~~would ~~cost~~be ofrequired ~~revenues~~to ~~and~~pay anto ~~increase~~other intelephone ~~wholesale~~companies ~~services~~to ~~cost~~use oftheir ~~revenues~~networks ~~resulting~~and ~~from~~facilities ~~new~~in ~~contracts,~~order asto ~~discussed~~provide ~~above~~local services.

The increase in cost of revenues during the three months ended March 31, 2012 compared to the prior year period was primarily due to the inclusion of STS Telecom cost of revenues for a full period in 2012 compared to a partial period in 2011, partially offset by the decline on local services and interconnection services.

Selling, general and administrative expense

~~Selling,~~The ~~general~~following ~~and~~table ~~administrative~~presents ~~expense~~our ~~consists of expenses of~~ selling ~~and marketing~~, ~~field~~general ~~personnel~~and ~~engaged~~administrative inexpenses ~~direct~~for ~~network~~the ~~maintenance~~three ~~and~~months ~~monitoring~~ended March 31, ~~customer~~2011 ~~service~~ and ~~corporate administration.~~2012:

Selling, general and administrative expense decreased $2.6 million, or 7%, from the three months ended September 30, 2010 to the three months ended September 30, 2011 and decreased $3.2 million, or 3%,

	Three Months Ended
	March 31,				Change
	2011		2012		Dollars			Percent
	(dollars in thousands)
Selling, general and administrative expenses	$	35,704	$	33,615	$	(2,089	)	-6	%

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~~from~~Selling, ~~the~~general ~~nine~~and ~~months~~administrative ~~ended~~expenses ~~September 30,~~consist ~~2010~~of toexpenses ~~the~~related ~~nine~~to ~~months~~sales ~~ended~~and ~~September 30~~marketing, ~~2011.~~customer ~~The~~service, ~~decrease~~network ~~compared~~operations, toinformation ~~the~~technology, ~~prior~~regulatory, ~~year~~billing ~~periods~~and ~~was~~collections, ~~primarily~~corporate ~~attributable~~administration, toand alegal ~~favorable~~and ~~tax~~accounting. ~~settlement~~Such ~~recognized~~costs ~~during~~include ~~the~~salaries ~~three~~ and ~~nine~~related ~~months~~employee ~~ended~~costs ~~September 30,~~(including ~~2011~~stock-based ~~and~~compensation), ~~decreases~~outsourced ~~in facilities costs~~labor, professional fees, ~~data~~property ~~processing~~taxes, ~~bad~~travel, ~~debt~~insurance, ~~expense and other corporate overhead expenses. Partially offsetting these decreases was the inclusion of STS Telecom’s selling~~rent, ~~general~~advertising and other administrative expenses ~~and an increase in stock-based compensation expense~~.

The decrease in selling, general and administrative expense during the three months ended March 31, 2012 compared to the prior year period was primarily attributable to decreases in personnel-related costs, outsourced labor, stock-based compensation, facilities costs, professional fees and other corporate overhead expenses. These decreases were primarily driven by a reduction in headcount over the past year. Partially offsetting these decreases was the inclusion of STS Telecom’s selling, general and administrative expenses for a full period in 2012 compared to 2011.

Depreciation and amortization

~~Depreciation~~The ~~and~~following ~~amortization~~table ~~includes~~presents our depreciation ~~of property~~ and ~~equipment and~~ amortization ofexpense ~~definite-lived~~for ~~intangible assets acquired in purchases of businesses. Property and equipment is depreciated using~~ the straight-line method over the estimated useful lives of the various asset classes. Definite-lived intangible assets, which primarily consist of customer relationships, developed technology and trade names, are amortized on a straight-line basis over their estimated useful lives, which range from three tomonths ~~nine~~ended ~~years. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such assets~~March 31, ~~and~~2011 ~~the developed technology~~ and ~~trade names are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.~~2012:

Depreciation and amortization expense increased $4.5 million, or 32%, from the three months ended September 30, 2010 to the three months ended September 30, 2011, and increased $10.9 million, or 26%, from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. The increase compared to the prior year periods was due to an increase in amortization expense, offset by a decrease in depreciation expense. The increase in amortization expense compared to the prior year period was due to amortization related to identifiable intangible assets established in connection with EarthLink’s acquisition of us and our acquisition of STS telecom. The decrease in depreciation expense compared to the prior year period was due to a reduction in property equipment recorded at fair value in connection with EarthLink’s acquisition of us and property and equipment becoming fully depreciated over the past year, partially offset by an increase in depreciation expense resulting from property and equipment obtained in the acquisition of STS Telecom.

	Three Months Ended
	March 31,				Change
	2011		2012		Dollars			Percent
	(dollars in thousands)

Depreciation expense	$	10,592	$	10,550	$	(42	)	0	%
Amortization expense	6,074		6,779		705			12	%
Total	$	16,666	$	17,329	$	663		4	%

~~Acquisition~~Depreciation and amortization includes depreciation of property and equipment and amortization of definite-~~related~~lived ~~costs~~intangible assets acquired in purchases of businesses. Property and equipment is depreciated using the straight-line method over the estimated useful lives of the various asset classes. Leasehold improvements are depreciated using the straight-line method over the shorter of the estimated useful life or the remaining term of the lease. Definite-lived intangible assets, which primarily consist of customer relationships, developed technology and trade names, are amortized on a straight-line basis over their estimated useful lives, which range from three to six years. The customer relationships are being amortized using the straight-line method because this matches the estimated cash flow generated by such asset, and the developed technology and trade name are being amortized using the straight-line method because a pattern to which the expected benefits will be consumed or otherwise used up could not be reliably determined.

~~Acquisition-related~~The ~~costs~~decrease ~~consist~~in ofdepreciation ~~costs~~expense ~~directly~~during ~~related~~the tothree ~~acquisitions,~~months ~~such~~ended asMarch 31, ~~employee~~2012 ~~severance~~compared ~~and~~to ~~retention~~the ~~costs;~~prior ~~transaction~~year ~~related~~period ~~costs,~~was ~~which~~primarily ~~include~~attributable ~~external~~to ~~costs~~property ~~directly~~and ~~related~~equipment tobecoming ~~acquisitions~~fully ~~such~~depreciated asover ~~advisory,~~the ~~legal,~~past ~~accounting,~~year. ~~valuation~~The ~~and~~increase ~~other~~in ~~professional~~amortization ~~fees;~~expense ~~and~~during ~~other~~the ~~integration~~three ~~related~~months ~~costs.~~ended ~~Acquisition-related~~March 31, ~~costs~~2012 ~~are~~compared ~~expensed~~to in the ~~period~~prior inyear ~~which~~period ~~the~~was ~~costs~~due ~~are~~to ~~incurred~~an ~~and~~increase ~~the~~in ~~services~~amortization ~~are~~expense ~~received.~~associated ~~These~~with ~~expenses~~the ~~are~~identifiable ~~included~~intangible inasset ~~acquisition-related~~established ~~costs~~ in ~~the~~connection ~~Company’s~~with ~~Condensed~~our ~~Consolidated~~acquisition ~~Statement~~ of ~~Operations.~~STS ~~During~~Telecom ~~the~~resulting ~~three~~from ~~and~~including ~~nine~~a ~~months~~full ~~ended~~period ~~September 30,~~of ~~2010~~expense ~~and~~in ~~2011,~~2012 ~~acquisition-related~~compared ~~costs~~to ~~consisted~~a ofpartial ~~the~~period ~~following:~~in 2011.

	Three Months Ended				Nine Months Ended
	Predecessor		Successor		Predecessor		Successor
	Entity		Entity		Entity		Entity
	September 30,		September 30,		September 30,		September 30,
	2010		2011		2010		2011
Severance and retention costs	$	—	$	1,530	$	—	$	2,748
Transaction related costs	2,064		—		2,064		176
Integration related costs	—		134		—		622
Total acquisition-related costs	$	2,064	$	1,664	$	2,064	$	3,546

Interest expense and other, net

Interest expense and other, net, is primarily comprised of interest expense incurred on our outstanding indebtedness, including our 10.5% senior secured notes due 2016 (the “Notes”); interest income earned on our cash and cash equivalents; and other miscellaneous income and expense items.

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~~Interest~~Acquisition ~~expense~~ and other, net, decreased $2.0 million, or 21%, from the three months ended September 30, 2010 to the three months ended September 30, 2011, and decreased $7.1 million, or 23%, from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. Interest expense and other, net, for the nine months ended September 30, 2010 includes a writeintegration-~~off~~related ~~of $7.9 million of unamortized debt discount and issuance~~ costs in connection with the repayment of indebtedness outstanding under our first lien and second lien senior secured credit facilities and our former revolving credit facility from the proceeds of our Notes offering in April 2010.

~~The~~Acquisition ~~decrease in interest expense~~ and ~~other,~~integration-related ~~net,~~costs ~~during~~consist ~~the~~of ~~three~~transaction-related ~~months ended September 30~~costs, ~~2011~~which ~~compared~~are toexternal ~~the~~costs ~~prior~~directly ~~year~~related ~~period was primarily attributable~~ to ~~amortization~~acquisitions, ofsuch ~~debt~~as ~~premium~~advisory, ~~resulting~~legal, ~~from~~accounting, ~~the~~valuation ~~increase~~and inother ~~fair~~professional ~~value~~fees; ofseverance ~~debt~~and ~~recorded~~retention ~~through~~costs ~~purchase~~directly ~~accounting.~~related ~~The~~to ~~decrease~~acquisitions; ~~in interest expense~~ and ~~other,~~integration-related ~~net,~~costs ~~during~~directly ~~the~~related ~~nine~~to ~~months ended September 30~~acquisitions, ~~2011~~such ~~compared~~as tosystem ~~the~~conversion, ~~prior~~rebranding ~~year~~costs ~~period~~and ~~was~~integration ~~primarily~~related ~~attributable~~consulting toand ~~the~~employee ~~write-off~~costs. ofAcquisition ~~unamortized debt discount~~ and ~~issuance~~integration-related costs ~~recognized~~are expensed in the ~~prior year~~ period ~~and~~in which the ~~amortization~~costs ofare ~~debt~~incurred ~~premium~~and ~~resulting from~~ the ~~increase~~services inare ~~fair~~received ~~value~~and ofare ~~debt~~included ~~recorded~~in ~~through~~acquisition ~~purchase~~and ~~accounting,~~integration-related ~~partially~~costs ~~offset by an increase~~ in the ~~weighted~~Condensed ~~average~~Consolidated ~~interest~~Statement ~~rate~~of onComprehensive ~~our~~Loss. ~~outstanding~~Acquisition ~~borrowings~~ and anintegration-related ~~increase~~costs inconsisted ~~our outstanding debt balance due to the issuance~~ of the ~~Notes~~following induring ~~April 2010 and~~ the ~~repayment~~three ofmonths ~~$305.5~~ended ~~million~~March ~~aggregate~~31, ~~amount~~2011 ofand ~~indebtedness with the proceeds of the Notes offering.~~2012:

	Three Months Ended
	March 31,
	2011		2012
	(in thousands)

Transaction-related costs	$	176	$	—
Severance and retention costs	649		263
Integration-related costs	—		11
Total acquisition and integration-related costs	$	825	$	274

Interest expense and other, net

The following table presents our interest expense and other, net, for the three months ended March 31, 2011 and 2012:

	Three Months Ended
	March 31,						Change
	2011			2012			Dollars		Percent
	(dollars in thousands)
Interest expense and other, net	$	(7,554	)	$	(7,515	)	$	39	-1	%

Interest expense and other, net, is primarily comprised of interest expense incurred on our outstanding indebtedness, including our 10.5% senior secured notes due 2016 (the “Notes”) and capital leases; amortization of debt premium; interest income earned on our cash and cash equivalents; and other miscellaneous income and expense items.

The decrease in interest expense and other, net, during the three months ended March 31, 2012 compared to the prior year period was primarily attributable to an increase in amortization of the debt premium on our debt recorded in the Acquisition. As a result of EarthLink’s acquisition of us, the Notes were recorded at acquisition date fair value. The fair value was based on publicly-quoted market prices. The resulting debt premium is being amortized over the remaining life of the Notes using the effective interest method.

Income Tax Provision

We ~~recognized~~recorded an income tax provision of $0.3 million and $0.1 million during the three ~~and nine~~ months ended ~~September~~March 3031, 2011 and 2012, ~~which~~respectively. ~~consisted~~We utilize the liability method of ~~state~~accounting for income ~~amounts~~taxes. ~~payable~~Under ~~due~~the toliability ~~the~~method, ~~net~~deferred ~~operating~~taxes ~~loss~~are ~~carryforward~~determined ~~limitations~~based ~~associated~~on ~~with~~the ~~provisions~~difference ofbetween the ~~Internal~~financial ~~Revenue~~and ~~Code~~tax ~~which~~bases ~~limit~~of anassets ~~entity’s~~and ~~ability~~liabilities tousing ~~utilize~~enacted ~~net~~tax ~~operating~~rates ~~loss~~in ~~carryforwards~~effect in the ~~case~~years ofin ~~certain~~which ~~events~~the differences are expected to reverse. A valuation allowance has been recorded against deferred tax assets, ~~including~~as ~~significant~~we ~~changes~~are inunable ~~ownership~~to ~~interests~~conclude under relevant accounting standards that it is more likely than not that deferred tax assets will be realizable.

We continue to maintain a full valuation allowance of $93.0 million against our unrealized deferred tax assets, which include net operating loss carryforwards. We will reduce the valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets can be realized on a stand-alone basis.16

To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the nine months ended September 30, 2010 and 2011 (in thousands):

	Predecessor Entity			Successor Entity
	Nine Months			Nine Months
	Ended			Ended
	September 30, 2010			September 30, 2011			$ Change			% Change
Net cash provided by operating activities	$	58,632		$	37,329		$	(21,303	)	-36	%
Net cash used in investing activities	(42,653		)	(57,184		)	(14,531		)	34	%
Net cash (used in) provided by financing activities	(1,967		)	26,486			28,453			-1447	%
Net increase in cash and cash equivalents	$	14,012		$	6,631		$	(7,381	)	-53	%

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To the extent we report income in future periods, we intend to use our net operating loss carryforwards to the extent available to offset taxable income and reduce cash outflows for income taxes. Our ability to use our federal and state net operating loss carryforwards and federal and state tax credit carryforwards may be subject to restrictions attributable to certain transactions such as equity transactions in the future resulting from changes in ownership as defined under the Internal Revenue Code.

Liquidity and Capital Resources

The following table sets forth summarized cash flow data for the three months ended March 31, 2011 and 2012:

	Three Months Ended
	March 31,						Change
	2011			2012			Dollars			Percent
	(dollars in thousands)

Net cash provided by operating activities	$	20,602		$	24,646		$	4,044		20	%
Net cash used in investing activities	(35,321		)	(13,858		)	21,463			-61	%
Net cash provided by (used in) financing activities	26,762			(99		)	(26,861		)	-100	%
Net increase in cash and cash equivalents	$	12,043		$	10,689		$	(1,354	)	-11	%

Operating activities

~~The~~Net ~~decrease in net~~ cash provided by operating activities increased during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 ~~was~~ primarily due to ana ~~increase~~reduction in operating expenses as our over headcount has decreased, a decrease in cash used for ~~prepaid~~severance ~~assets~~and other acquisition-related expenses and incremental cash ~~used~~generated ~~for~~by ~~accounts~~the ~~payable,~~operating ~~accrued~~activities ~~and~~of ~~other~~STS ~~liabilities~~Telecom.

Investing activities

~~The~~Cash ~~increase in cash flows~~ used infor investing activities decreased during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 ~~was~~ primarily due to $22.91 million of cash ~~used~~paid ~~for~~to ~~acquisitions~~acquire STS Telecom during the three months ended March 31, ~~net~~2011. ofNo cash ~~acquired,~~was ~~due~~used tofor acquisitions during the ~~acquisition~~three ofmonths ~~STS~~ended ~~Telecom~~March 31, 2012. Partially offsetting ~~this~~the decrease was aan ~~$9.5~~increase ~~million decrease~~ in capital expenditures.

Financing activities

~~The~~Cash ~~change~~provided inby ~~cash flows from~~ financing activities decreased during the ~~nine~~three months ended ~~September~~March 3031, ~~2011~~2012 compared to the ~~nine~~three months ended ~~September~~March 3031, ~~2010~~2011 ~~was~~ primarily due to a $30.0 million investment by EarthLink during the ~~nine~~three months ended ~~September~~March 3031, 2011 to fund the STS Telecom acquisition. No investments were made by EarthLink during the three months ended March 31, 2012. Partially offsetting this change was a decrease in repayment of debt and capital lease obligations. During the months ended March 31, 2011, we repaid $3.0 million of debt assumed in the STS Telecom acquisition and repurchased approximately $0.2 million outstanding principal amount of the Notes.

During the nine months ended September 30, 2011, we used $3.6 million for repayments of long-term debt and capital leases. Under the indenture for the Notes, following the consummation of the Acquisition, we were required to offer to repurchase any or all of the Notes at 101% of their principal amount. The tender window was open from December 20, 1010 through January 18, 2011. As a result, approximately $0.2 million outstanding principal amount of the Notes was repurchased in January 2011. Also during the nine months ended September 30, 2011, we repaid $3.0 million of debt assumed in the STS Telecom acquisition and made payments on capital leases assumed in the STS Telecom acquisition.

Future Uses of Cash

WeOur ~~believe~~primary ~~that~~future tocash ~~remain~~requirements ~~competitive~~will ~~with~~be ~~much~~for ~~larger~~outstanding ~~telecommunications companies~~indebtedness, ~~we will require significant additional~~ capital expenditures ~~to enhance~~ and ~~operate~~general ~~our~~business ~~fiber~~working ~~network. We expect to incur~~ capital ~~expenditures to maintain and upgrade our network and technology infrastructure~~requirements. The actual amount of capital expenditures may fluctuate due to a number of factors which are difficult to predict and could change significantly over time. Additionally, technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We expect to use cash related to our outstanding indebtedness, including payments for interest. We also may use cash to redeem ~~the~~our Notes in accordance with the terms of the related indenture or to ~~repurchase the Notes. We also expect to use cash for required payment of wages and salaries to employees,~~ purchase ofthem ~~network~~in ~~capacity~~the ~~and~~open ~~access under contracts, and payment of fees for other goods and services, including maintenance and commission payments~~market.

~~Our~~We ~~cash~~believe ~~requirements~~that ~~depend~~to onremain ~~numerous~~competitive ~~factors~~with much larger communications companies, ~~including~~we ~~the~~will ~~costs~~require ~~required~~significant additional capital expenditures to ~~maintain~~enhance and operate our fiber network. ~~infrastructure,~~We ~~the~~plan ~~pricing~~to ofmake ~~our~~capital ~~services,~~expenditures ~~and~~relating ~~the~~to ~~level~~acquiring ofnew ~~resources~~customers, ~~used~~to ~~for~~further enhance our ~~sales~~customers’ experience and ~~marketing~~to ~~activities, among others.~~maintain

~~Future Sources of Cash~~17

Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the nine months ended September 30, 2010 and 2011, we generated $58.6 million and $37.3 million in cash from operations, respectively. As of September 30, 2011, we had $50.2 million in cash and cash equivalents.

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~~plan~~and ~~for~~upgrade atour ~~least~~network ~~the~~and ~~next~~technology ~~12 months~~infrastructure. ~~Our~~The ~~ability~~actual toamount ~~meet all~~ of ~~our~~capital ~~cash~~expenditures ~~needs~~may ~~during~~fluctuate ~~the~~due ~~next~~to 12a ~~months~~number ~~and~~of ~~thereafter~~factors ~~could~~which beare ~~adversely~~difficult ~~affected~~to bypredict ~~various circumstances, including an increase in customer attrition, employee turnover, service disruptions~~ and ~~associated~~could ~~customer~~change ~~credits,~~significantly ~~acceleration~~over oftime. ~~critical operating payables~~Additionally, ~~lower~~technological ~~than~~advances ~~expected collections of accounts receivable, and other circumstances outside of our immediate and direct control. We~~ may ~~determine~~require ~~that~~us ~~it is necessary or appropriate~~ to ~~obtain~~make ~~additional~~capital ~~funding~~expenditures ~~through new debt financing~~ to ~~address~~develop ~~such contingencies~~ or ~~changes~~acquire tonew ~~our~~equipment ~~business plan. We cannot provide any assurance as to whether,~~ or astechnology toin ~~the~~order ~~terms on which, we would be able~~ to ~~obtain~~replace ~~such~~aging ~~debt~~or ~~financing,~~obsolete ~~which would be subject to limitations imposed by covenants contained in our Notes and which would be negatively affected by adverse developments in the credit and capital markets~~equipment.

~~Indebtedness~~We also expect to use cash for required payment of wages and salaries to employees, purchase of network capacity and access under contracts, and payment of fees for other goods and services, including maintenance and commission payments.

~~Senior~~Our ~~Secured~~cash ~~Notes.~~requirements Asdepend ofon ~~September 30,~~numerous ~~2011~~factors, weincluding ~~had~~the ~~outstanding~~costs ~~$324.8~~required ~~million~~to ~~aggregate~~maintain ~~principal~~our ~~amount~~network ~~of 10.5% senior secured notes due April 1~~infrastructure, ~~2016.~~the Aspricing ~~a result~~ of ~~EarthLink’s~~our ~~acquisition of us~~services, and the ~~Notes~~level ~~were~~of ~~recorded~~resources atused ~~acquisition~~for ~~date~~our ~~fair~~sales ~~value.~~and ~~The~~marketing ~~fair~~activities, ~~value~~among ~~was based on publicly-quoted market prices~~others. ~~The resulting $26.3 million debt premium is being amortized over the remaining life of the Notes.~~

~~Compliance~~Sources ~~With Financial Covenants. We were in compliance with all~~ of ~~financial covenants as of September 30, 2011.~~Cash

Our principal sources of liquidity are our cash and cash equivalents, as well as the cash flow we generate from our operations. During the three months ended March 31, 2011 and 2012, we generated $20.6 million and $24.6 million in cash from operations, respectively. As of March 31, 2012, we had $45.6 million in cash and cash equivalents.

We believe that our cash on hand and the cash flows we expect to generate from operations under our current business plan will provide us with sufficient funds to enable us to fund our planned capital expenditures, satisfy our debt service requirements, and meet our other cash needs under our current business plan for at least the next 12 months. Our ability to meet all of our cash needs during the next 12 months and thereafter could be adversely affected by various circumstances, including an increase in customer attrition, employee turnover, service disruptions and associated customer credits, acceleration of critical operating payables, lower than expected collections of accounts receivable, and other circumstances outside of our immediate and direct control. We may determine that it is necessary or appropriate to obtain additional funding through new debt financing to address such contingencies or changes to our business plan. We cannot provide any assurance as to whether, or as to the terms on which, we would be able to obtain such debt financing, which would be subject to limitations imposed by covenants contained in our Notes and which would be negatively affected by adverse developments in the credit and capital markets.

Debt Covenants

Under the indenture governing our Notes, acceleration on principal payments would occur upon payment default or violation of debt covenants. We were in compliance with all covenants under the indenture governing our Notes as of March 31, 2012.

Off-Balance Sheet Arrangements

As of ~~September~~March 3031, ~~2011~~2012, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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Related Party Transactions

We have a services agreement with EarthLink pursuant to which EarthLink and its subsidiaries provide us certain support services in exchange for management fees. In addition, we provide EarthLink and its subsidiaries certain support services in exchange for management fees. The management fees are determined based on the costs to provide such services. Net operating expenses for services received from and provided to EarthLink were $0.5 million and $0.4 million during the three months ended March 31, 2011 and 2012, respectively.

Safe Harbor Statement

The Management’s Discussion and Analysis and other portions of this Quarterly Report on Form 10-Q include “forward-looking” statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described. Although we believe that the expectations expressed in these forward-looking statements are reasonable, we cannot promise that our expectations will turn out to be correct. Our actual results could be materially different from and worse than our expectations. With respect to such forward-looking statements, we seek the protections afforded by the Private Securities Litigation Reform Act of 1995. These risks and uncertainties (1) that if we ~~may~~are ~~not~~unable beto ~~able~~adapt to ~~execute~~changes ~~our~~in ~~business~~technology ~~strategy~~and customer demands, ~~which~~we ~~could~~may ~~adversely~~not ~~impact~~remain ~~our~~competitive, ~~results~~and ofour ~~operations~~revenues and ~~cash~~operating ~~flows~~results could suffer; (2) that ~~adverse~~unfavorable general economic conditions could harm our business; (3) that if we doface ~~not~~significant ~~continue~~competition toin ~~innovate~~the ~~and~~communications ~~provide~~industry ~~products~~that ~~and~~could ~~services~~reduce our profitability; (4) that ~~are~~decisions ~~useful~~by tothe ~~customers,~~Federal weCommunications ~~may~~Commission ~~not~~relieving ~~remain~~incumbent ~~competitive~~carriers of certain regulatory requirements, and possible further deregulation in the future, may restrict our ~~revenues~~ability to provide services and ~~operating~~may ~~results~~increase ~~could~~the ~~suffer~~costs we incur to provide these services; (45) that if we ~~face~~are ~~significant~~unable ~~competition~~to ~~that~~interconnect ~~could~~with ~~reduce~~AT&T and other incumbent carriers on acceptable terms, our ~~profitability~~ability to offer competitively priced local telephone services will be adversely affected; (56) that our operating performance will suffer if we ~~may~~are not beoffered ~~able~~competitive torates ~~compete~~for ~~effectively~~the ifaccess services we ~~are~~need ~~unable~~ to ~~install~~provide ~~additional~~our ~~network~~long ~~equipment~~distance orservices; ~~convert~~(7) that ~~our~~we ~~network~~may toexperience ~~more~~reductions ~~advanced~~in ~~technology~~switched access and reciprocal compensation revenue; (68) that failure to obtain and maintain necessary permits and rights-of-way could interfere with our network infrastructure and operations; (79) that ~~our~~we have substantial business ~~may~~relationships ~~suffer~~with ifseveral ~~third~~large ~~parties~~telecommunications ~~used~~carriers, ~~for~~and some of our customer ~~service~~agreements ~~and~~may ~~technical~~not ~~support~~continue due to financial difficulty, acquisitions, non-renewal or other factors, which could adversely affect our revenue and ~~certain~~results ~~billing~~of ~~services~~operations; ~~are~~(10) that we may be unable to ~~provide~~hire ~~these~~and ~~services~~retain orsufficient ~~terminate~~qualified ~~their~~personnel, ~~relationships~~and ~~with~~the loss of any of our key executive officers could adversely affect us; (811) that ~~decisions~~privacy byconcerns ~~the~~relating ~~Federal~~to ~~Communications~~our ~~Commission~~business ~~relieving~~could ~~incumbent~~damage ~~telephone~~our ~~companies~~reputation ofand ~~certain~~deter ~~regulatory~~current ~~requirements,~~and potential users from using our services; (12) that security breaches could damage our reputation and ~~possible~~harm ~~further~~our ~~deregulation~~operating inresults; ~~the~~(13) ~~future,~~that ~~may~~interruption ~~restrict~~or failure of our ~~ability~~network toand ~~provide~~information ~~services~~systems and ~~may~~other ~~increase~~technologies ~~the~~could ~~costs~~impair weour ~~incur~~ability to provide ~~these~~our services, which could damage our reputation and harm our operating results; (914) that our ~~wholesale~~business ~~services,~~depends ~~including~~on ~~our~~effective ~~broadband~~business ~~transport~~support ~~services,~~systems ~~continue~~and toprocesses; be(15) that government regulations could adversely ~~affected~~affect byour ~~pricing~~business ~~pressure,~~or ~~network~~force ~~overcapacity,~~us ~~service~~to ~~cancellations~~change ~~and~~our ~~other~~business ~~factors~~practices; (1016) that our ~~financial~~business ~~performance~~may ~~will~~ suffer if wethird parties are ~~not~~unable ~~offered~~to ~~competitive~~provide ~~rates~~services ~~for~~or ~~the~~terminate ~~access~~their ~~services~~relationships with us; (17) that we ~~need~~may not be able to ~~provide~~protect our ~~long~~intellectual ~~distance services~~property; (1118) that we ~~have~~may ~~experienced~~be ~~and~~accused ~~may~~of ~~continue~~infringing toupon ~~experience~~the ~~reductions~~intellectual inproperty ~~switched~~rights ~~access~~of third parties, which is costly to defend and ~~reciprocal~~could ~~compensation~~limit ~~revenue~~our ability to use certain technologies in the future; (1219) that ~~our~~if ~~inability~~we, or other industry participants, are unable to ~~maintain~~successfully ~~and~~defend ~~upgrade~~against legal actions, we could face substantial liabilities or suffer harm to our ~~network~~financial ~~infrastructure,~~and ~~portions~~operational ofprospects; ~~which~~(20) that we domay ~~not~~be ~~own~~required to recognize impairment charges on our goodwill and intangible assets, ~~could~~which would adversely affect our ~~operating~~ results of operations and financial position; (1321) that ifwe may have exposure to greater than anticipated tax liabilities; (22) that we are ~~unable~~a wholly-owned subsidiary of EarthLink and therefore subject to ~~interconnect~~strategic ~~with~~decisions ~~AT&T~~of EarthLink and ~~other~~affected ~~incumbent~~by ~~carriers~~EarthLink’s onperformance; ~~acceptable~~(23) ~~terms~~that as a wholly-owned subsidiary of EarthLink, ~~our~~any ~~ability~~arrangements toor ~~offer~~agreements ~~competitively~~between ~~priced~~the ~~local~~two ~~telephone~~entities ~~services~~may ~~will~~have bedifferent ~~adversely~~terms ~~affected~~than would have been negotiated by independent, unrelated parties; (1424) that ~~government~~our ~~regulations~~indebtedness could adversely affect our ~~business~~financial orhealth ~~force~~and uslimit our ability to ~~change~~react ~~our~~to ~~business~~changes ~~practices~~in our industry; (1525) that we may require additional capital to support business growth, and this capital may not be ~~unable~~available to ~~retain~~us on acceptable terms, or at all. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2011.

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sufficient qualified personnel, which could adversely affect us; (16) that interruption or failure of our network and information systems and other technologies could impair our ability to provide our services, which could damage our reputation and harm our operating results; (17) that our business depends on effective business support systems and processes; (18) that we may not be able to protect our intellectual property; (19) we may be accused of infringing upon the intellectual property rights of third parties, which is costly to defend and could limit our ability to use certain technologies in the future; (20) that if we, or other industry participants, are unable to successfully defend against legal actions, we could face substantial liabilities or suffer harm to our financial and operational prospects; (21) that our indebtedness could adversely affect our financial health and limit our ability to react to changes in our industry; (22) that we are a wholly-owned subsidiary of EarthLink and therefore subject to strategic decisions of EarthLink and affected by EarthLink’s performance; (23) that as a wholly-owned subsidiary of EarthLink, any arrangements or agreements between the two entities may have different terms than would have been negotiated by independent, unrelated parties. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are not intended to represent a complete list of all risks and uncertainties inherent in our business, and should be read in conjunction with the more detailed cautionary statements and risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we carried out an evaluation, with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended ~~September~~March 3031, ~~2011~~2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II

Item 1. Legal Proceedings.

~~ITC^DeltaCom~~We isare a party to various disputes, litigation or other legal proceedings ~~that~~arising ~~are~~from ~~ordinary~~normal ~~and~~business ~~incidental~~activities. toThe ~~its~~result ~~business~~of any current or future disputes, litigation or other legal proceedings is inherently unpredictable. ~~Management~~Our ~~does~~management, ~~not~~however, ~~expect~~believes that ~~any~~there ~~currently~~are ~~pending~~no disputes, litigation or other legal proceedings ~~will~~asserted or pending against us that could have, individually or in the aggregate, a material adverse effect on ~~ITC^DeltaCom’s~~its financial position, results of operations or cash flows, and believes that adequate provision for any probable and estimable losses has been made in our consolidated financial ~~position~~statements.

Item 1A. Risk Factors.

There were no material updates from the risk factors disclosed in ITC^DeltaCom’s Annual Report on Form 10-K for the year ended December 31, ~~2010~~2011.

Item 5. Other Information.

None.

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Item 6. Exhibits.

(a) Exhibits. The following exhibits are filed as part of this report:

31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS XBRL Instance Document *

101.SCH XBRL Taxonomy Extension Schema Document *

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *

101.DEF XBRL Taxonomy Extension Definition Linkbase Document *

101.LAB XBRL Taxonomy Extension Label Linkbase Document *

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *

* Pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for the purposes of section 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities and Exchanges Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ITC^DELTACOM, INC.
Date:	~~November~~April 430, ~~2011~~2012	/s/ ROLLA P. HUFF
		Rolla P. Huff, Chairman and Chief Executive Officer (principal executive officer)
		Rolla P. Huff, Chairman and Chief Executive
Date:	November 4, 2011	/s/ BRADLEY A. FERGUSON
		Officer (principal executive officer)
Date:	April 30, 2012	/s/ BRADLEY A. FERGUSON
		Bradley A. Ferguson, Chief Financial Officer
		(principal financial and accounting officer)

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